Lululemon Athletica Inc., the Vancouver-based retailer of trendy workout gear, admits the recent recall of its black Luon pants will put the pinch on earnings this year, but says keeping customer loyalty is paramount.
"Delivering the top quality our guests expect is a critical factor in our differentiation in the market place," CEO Christine Day said in delivering an upbeat fourth-quarter earnings report Thursday that slightly exceeded the expectations of analysts.
"The fundamentals of our business are strong, we delivered excellent results in 2012, and we plan to continue to earn the loyalty of our customers and shareholders every day going forward."
The company, which operates 211 stores in North America and Australia and reports in U.S. currency, said earlier this week it was pulling some of its stretchy black pants from its shelves because of manufacturing problems that made them too sheer.
It was the second quality problem the company has faced recently after earlier experiencing bleeding problems with dyes in some of its clothing, an issue that has since been resolved.
Not so with the problem with the company's proprietary black Luon, with Day telling the analysts it wasn't known whether it might be ingredients, specific manufacturers or problems with the manufacturing process.
Lululemon said it has a team working with suppliers to identify and correct issue.
Recall to hit revenue by between $12 and $17M US
"We are pursuing several hypothesis in parallel with our manufacturing partners to determine the root cause," she said, adding that the pants passed all standard quality assurance tests before shipping.
"The only way that you can actually test for the issue is to put the pants on and bend over," she said.
As it is, the set back is expected to reduce revenue by between $12 million US and $17 million in the first quarter and drive down estimated earnings per share by 11 to 12 cents.
But overall, Lululemon is expecting to be profitable in the first quarter with diluted earnings of between 28 and 30 cents per share of earnings and between $333 million and $343 million of revenue.
However, that's below a pre-announcement consensus estimate of 44 cents per share of earnings and $352 million of revenue, according to figures compiled by Thomson Reuters.
In the fourth quarter, which ended before the recall, Lululemon did slightly better than analysts had been expecting.
On a per-share basis, Lululemon earned 75 cents in the fourth quarter — a penny above the consensus estimate of 74 cents per share.
E-commerce revenue grow 85.5%
Revenue during the key holiday shopping period was also up, rising by 31 per cent year-to-year to $485.5 million — in line with expectations.
During the comparable period last year, Lululemon had $371.5 million of revenue and $73.9 million or 51 cents per share of net income.
E-commerce revenue grew 85.5 per cent over the year to $197.3 million representing 14.4 per cent of sales, a figure expected to grow in future.
"E-commerce will be a valuable tool as we expand ours brand's presence around the world and it gives us an exciting opportunity to charter new ground in retail with an integrated footprint to meet the future in ways in which guests shop," Day said.
For all of fiscal 2013, Lululemon expects net revenue to be in the range of $1.61 billion US to $1.64 billion and diluted earnings per share to be in the range of $1.95 to $1.99.
Lululemon expects to expand with at least store openings in 2013, six in the U.S., one in Canada and one in Australia. Another store opening is expected in Hong Kong within the next 12 months, with openings in London in 2014.
It also plans to establish local community connections and introduces products to a variety of other markets in Europe and Asia through strategic sales, showrooms and e-commerce.